Workers sticking to target date funds

401(k) participants avoid fiscal advisers

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A move to allow employers to help their workers better invest for retirement got a boost in 2006, when Congress approved the Pension Protection Act and freed up companies to bring in financial advisers for their staff.

But both employees and employers seem to be taking the easy way out, sticking with so-called target date retirement funds that automatically adjust their portfolios over time.

According to the Washington, D.C.-based Investment Company Institute's 2013 fact book, there were 603 target date funds with $470 billion in assets in 2006, the year the Pension Protection Act was created. By 2012, there were 1,156 target date funds with $1.3 trillion in assets.

"Target date funds make sense for individuals who want to delegate the risk management and allocation of their retirement account to a professional," said Bob Hapanowicz, president of H&A Wealth Advisors, Downtown. "For a lot of people, it's just simpler."

According to Vanguard's 2011 How America Saves Study (the most recent available), only about 15 percent of 401(k) plan participants took advantage of financial advice services offered through their employers.

It used to be that companies and plan providers could only offer information and educational resources to help workers make informed decisions about their retirement assets.

But under the Pension Protection Act -- as long as employers follow the due diligence requirements and hire a financial adviser under a separate contract -- companies are protected from liability if the employee decides to sue the adviser for offering bad advice.

Paul Brahim, CEO of BPU Investment Management, Downtown, said he believes employers are not hiring advisers because it is expensive. Offering employees a target date fund costs the company nothing.

"Workers still need advice," Mr. Brahim said. "Employers have a way of providing that advice through the Pension Protection Act, and they are not taking advantage of it. They are not taking advantage of the safe harbor they have in hiring advisers. Instead they are taking advantage of the other safe harbor method and using target date funds in lieu of an adviser.

"I don't believe that serves the consumer at any level because the consumer still hasn't answered the question of 'Do I have enough and can I make it last?' Target date funds create a false sense of security. Workers still don't know how much money they need in their retirement plan and what their required rate of return is."

Target date funds are managed mutual funds that automatically adjust to a more conservative asset mix as the account owner approaches retirement or the target date fund nears its target date. If the account owner's retirement date is 2015, the fund will automatically scale down the stock exposure in the account and increase the bond portion as the year 2015 draws near.

But that approach is not always the best for an individual.

"What we find for some employees getting started target date funds are an easy button for them," said Greg Womack, a certified financial planner with Womack Investment Advisers in Edmond, Okla. In recent years, his firm has been doing more work with companies helping employees manage their investment accounts. "They appeal to retirement investors because the fund assumes the job of reallocating the asset mix over time.

"But as the employee gets more into the plan [by building up capital], it's typically better to look at other options."

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Tim Grant: or 412-263-1591.


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